(from the Introduction to Transportation Engineering Series)
Highways’ Hidden Subsidies
Highway users of course pay a user fee to pay for the cost of highways. Federal gas taxes are dedicated to the federal Highway Trust Fund, and many states, including Minnesota, have similar rules at the state level. So far, so good. The trust fund has in recent years fallen short of the amount that politicians want to spend on roads, but that is in principle easily corrected with an increase in the user fee or a decrease in spending. Most local roads (municipal and county) are paid for via local general revenue. This is also well known in the community, if not the general public.
The hidden subsidy is in states which have general sales taxes, but don’t apply them to gasoline. Thus, in Minnesota, I pay a sales tax on prepared food, but not gasoline (or clothing, or random other things). Thus relatively, spending is encouraged in those untaxed areas, which are 6.875% less taxed than other goods. This lack of a tax is not a subsidy in a state which doesn’t tax sales, and instead taxes income or property. But where sales are taxed, but gasoline is exempted, other goods are implicitly taxed more so gasoline can be explicitly taxed less. Note this is not universal across the US.
In California, there has long been both a sales and use tax. However the value of the sales tax on gasoline is now lower the sales tax on general goods, though for many years it was close or the same. There is argument about the fact that the sales tax is levied on both the gasoline and the user fee associated with the gasoline. In short, the general principal is that gasoline cannot be simultaneously be taxed with the funds dedicated to highways (thus acting as a user fee) and exempted from sales taxes without there being a subsidy that at least partially offsets the user fee. At a $3.00/gallon price of gas, a 6.875% tax raises $0.20625 per gallon. To compare, the state gas tax is $0.286 per gallon. Thus, in Minnesota the net state user fee is only about $0.08 per gallon, not the $0.286 per gallon widely advertised. The federal gas tax is $0.184 per gallon. This is more truly a user fee. Also since there is no federal sales tax, gasoline is not disproportionately favored. The tax in Minnesota is higher in some localities to pay for other things. We could similarly look at the motor vehicle sales tax (MVST), which is dedicated to transportation in Minnesota. It is 6.5%. Nothing wrong with dedicating the funds, but as a result, they cannot be counted as user fees, since sales tax revenue would otherwise go to general revenue. Based on this document, since 2011, 60% of the MVST goes to the Highway User Tax Distribution Fund, and 40% goes to the Transit Fund.
The general sales tax should apply to all goods equally to minimize distortions. Better, a value added tax should be used. Special taxes on beneficiaries should be used where they can be, but not in lieu of general taxes. There is sufficient economic capacity in the highway system for users to pay for the whole thing (the evidence being how much people have paid for gasoline per gallon in the past here, and how much they pay in other countries), it’s a shame we don’t take advantage of that. After paying for roads, and their externalities, and their share of the general tax burden, road users will be paying about their fair share. Taxes are needlessly complicated by special interests in the United States. This allows all sorts-of hidden subsidies. Let’s expose them to the sunlight, and then make objective decisions about whether we should lower the general sales tax on all other goods, and impose that tax rate on fuel.
Updated: Ben Ross made a similar point in Maryland transportation “lockbox” has a big hole.
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